Japan disaster recovery confronts funding dilemma

As estimates add up, political infighting slows the process down

By

LisaTwaronite

ChristopherNoble

Christopher Noble/MarketWatch

A debris field in Shichigahama. Hundreds of cars were destroyed by the tsunami.

TOKYO (MarketWatch) — More than three months after the earthquake and tsunami ravaged Japan’s Tohoku region, reconstruction moves ahead at an uneven pace, and so does the debate about how the government will fund it.

As frustration grows in Tohoku, political infighting about how the central government will pay the reconstruction bill has slowed the recovery process. The extent of the damage in some coastal cities has also affected the ability of local governments to distribute public funds and charitable donations to the people who need them most.

While politicians in Tokyo clashed, survivors in the disaster zone waited for help rebuilding their lives and livelihoods.

Recovery frustration in Japan

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Reconstruction moves at an uneven pace in the beach town of Shichigahama as survivors pick up the pieces and await the funding details of the government's reconstruction plan. MarketWatch's Christopher Noble reports.

Even before the March 11 natural disasters did billions of dollars’ worth of damage, left over 23,000 people dead or missing and triggered a nuclear crisis at the Fukushima Daiichi nuclear plant operated by Tokyo Electric Power Co. (9501)
TKECY, -0.50%
Japan’s national balance sheet wasn’t pretty. Its public debt was about twice the size of its $5 trillion economy, and ratings agencies were already warning that the country faced sovereign downgrades if it didn’t put its fiscal house in order. Those warnings have grown more urgent since the disaster.

In 1995, after an earthquake devastated the western port city of Kobe, total government recovery expenditure came to about ¥5 trillion ($64 billion). But after the Tohoku temblor, public and private estimates put the rebuilding costs in the ¥20 trillion–to–¥25 trillion range — and the public tab for compensating more than 80,000 displaced radiation victims is almost certain to climb.

As the estimates add up, political infighting has slowed the process. The Diet, Japan’s parliament, has been deadlocked over passing deficit-financing legislation needed to fund the main budget for the fiscal year that began in April.

A bill already approved by the ruling Democratic Party of Japan and major opposition parties puts reconstruction bonds in a separate category from the deficit-covering Japanese bonds. On Monday, the Diet passed a bill outlining the basic scheme for reconstruction, which included creating a new public agency in charge of rebuilding, permitting the establishment of special economic zones offering tax breaks, and allowing issuance of reconstruction bonds to fund the recovery efforts.

But the parties have yet to demonstrate that they can work together to pass tax hikes needed to fund the reconstruction bonds, even after the government of Prime Minister Naoto Kan survived a no-confidence motion earlier this month.

Local governments face hardship

Politics aside, logistical problems have also slowed down the distribution of funds to disaster victims.

Over ¥250 billion in donations have poured in to aid groups, primarily the Japanese Red Cross, which had made 35 cash remittances to 15 affected prefectures as of June 3. It gave a total of ¥84 billion to the prefectures, about ¥37 billion of which has been distributed to individual families.

“The municipal governments have to issue certificates of the damage, so the people can apply for government support — not just national fund-raising money through the Red Cross, but public money as well. This is an important process to ensure the equity, but it is taking time, because they have to visit each house’s location and decide if the house is destroyed or only damaged,” said spokeswoman Sayaka Matsumoto of the Japanese Red Cross.

“We would say the reason for the delays is at the municipal level. It’s not their fault — they’re not lazy — but lots of the workload is on their shoulders, and they lost manpower in the disaster, and important documents and computers — all gone. These difficulties make it hard for some local governments to function,” she said in a telephone interview.

Factories being repaired

The lagging public response contrasts with that of the private sector, which has rebounded faster than some economists and analysts had expected.

“If you take a cynical position, the early estimates usually show a worst-case scenario to the public and investors, and then they show that they can do better than that,” said Kiichi Murashima, an economist at Citigroup Global Markets Japan.

Christopher Noble/MarketWatch

Shipping containers litter the beach in Shichigahama. The containers were washed ashore from the port of Sendai several miles away.

Still, some cite the rapid progress as a hopeful example of Japan’s determination to get back to business as usual.

“There are many factories which are part of the global supply chain, and many are restarting. We expected it would take at least a half year or so, but many factories are being repaired,” said labor economist and Keio University President Atsushi Seike, who serves on the government’s 15-member Reconstruction Design Council.

On June 11, the council unveiled its first draft proposal, which recommended setting up deregulated special zones in disaster-hit areas. It also called for the government to issue reconstruction bonds, and fund these with hikes in income, consumption and corporate taxes.

“It is almost our consensus to avoid making future generations shoulder the burden,” council chief Makoto Iokibe said at a press conference, according to Kyodo News.

The panel will submit a final draft to the government by the end of the month. Its plan will be the basis for Japan’s second disaster-relief budget — the second extra budget for the fiscal year that began in April.

“It is said that the supplementary budget is going to be formed in June or July and likely pass the Diet by August,” said Junko Nishioka, chief economist at RBS Securities Japan.

The size of the second supplementary budget will likely total over ¥10 trillion, she said, but its timing “completely depends on the political condition.” If the conflict continues between Kan and those opposing him, “it may delay the timing of the fiscal measure’s implementation.”

Bank of Japan independence

Some politicians have called upon the Bank of Japan to directly underwrite JGBs — essentially printing money — to fund reconstruction.

But the central bank and key cabinet members have consistently opposed this. Private economists have warned such a move would undermine the BOJ’s independence and would also send an unfavorable signal to investors.

“The government sector has a big debt, but the household and private corporations have lots of savings, so they can accept costs. But once the market doubts that the Japanese government [can repay] debtors, then maybe the market will react,” said the Reconstruction Design Council’s Seike.

“We already have the risk of earthquake, risk of nuclear reactors — we do not have any room to accept the risk of markets,” Seike said, adding, “I hope the BOJ will keep its independence. Otherwise, we could see another tragedy.”

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